Science Applications International Corp 10-Q

Item 1. Financial Statements SCIENCE APPLICATIONS INTERNATIONAL CORPORATION CONDENSED AND CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) Three Months Ended May 5, 2023 April 29, 2022 (in millions, except per share amounts) Revenues $ 2,028 $ 1,996 Cost of revenues 1,793 1,770 Selling, general and administrative expenses 84 92 Acquisition and integration costs — 9 Other operating income ( 6 ) — Operating income 157 125 Interest expense 33 27 Other (income) expense, net 1 3 Income before income taxes 123 95 Provision for income taxes ( 25 ) ( 21 ) Net income 98 74 Net income attributable to non-controlling interest — 1 Net income attributable to common stockholders $ 98 $ 73 Earnings per share: Basic $ 1.80 $ 1.30 Diluted $ 1.79 $ 1.29 See accompanying notes to condensed and consolidated financial statements. -1- Table of Conten ts SCIENCE APPLICATIONS INTERNATIONAL CORPORATION CONDENSED AND CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED) Three Months Ended May 5, 2023 April 29, 2022 (in millions) Net income $ 98 $ 74 Other comprehensive (loss) income, net of tax: Net unrealized (loss) gain on derivative instruments ( 6 ) 37 Total other comprehensive (loss) income, net of tax ( 6 ) 37 Comprehensive income $ 92 $ 111 Comprehensive income attributable to non-controlling interest — 1 Comprehensive income attributable to common stockholders $ 92 $ 110 See accompanying notes to condensed and consolidated financial statements. -2- Table of Conten ts SCIENCE APPLICATIONS INTERNATIONAL CORPORATION CONDENSED AND CONSOLIDATED BALANCE SHEETS (UNAUDITED) May 5, 2023 February 3, 2023 (in millions) ASSETS Current assets: Cash and cash equivalents $ 422 $ 109 Receivables, net 995 936 Inventory, prepaid expenses and other current assets 77 152 Assets held for sale 181 — Total current assets 1,675 1,197 Goodwill 2,851 2,911 Intangible assets, net 980 1,009 Property, plant, and equipment (net of accumulated depreciation of $ 189 million and $ 194 million at May 5, 2023 and February 3, 2023, respectively) 91 92 Operating lease right of use assets 154 158 Other assets 206 176 Total assets $ 5,957 $ 5,543 LIABILITIES AND EQUITY Current liabilities: Accounts payable and accrued liabilities $ 809 $ 767 Accrued payroll and employee benefits 277 328 Deposit liability for assets held for sale (Note 4) 355 — Long-term debt, current portion 46 31 Liabilities held for sale 66 — Total current liabilities 1,553 1,126 Long-term debt, net of current portion 2,329 2,343 Operating lease liabilities 150 152 Other long-term liabilities 233 218 Commitments and contingencies (Note 11) Equity: Common stock, $ 0.0001 par value, 1 billion shares authorized, 54 million shares issued and outstanding as of May 5, 2023 and February 3, 2023 — — Additional paid-in capital 563 637 Retained earnings 1,113 1,035 Accumulated other comprehensive income 16 22 Total common stockholders' equity 1,692 1,694 Non-controlling interest — 10 Total stockholders' equity 1,692 1,704 Total liabilities and stockholders' equity $ 5,957 $ 5,543 See accompanying notes to condensed and consolidated financial statements. -3- Table of Contents SCIENCE APPLICATIONS INTERNATIONAL CORPORATION CONDENSED AND CONSOLIDATED STATEMENTS OF EQUITY (UNAUDITED) Shares of common stock Additional paid-in capital Retained earnings Accumulated other comprehensive income (loss) Non-controlling interest Total (in millions) Balance at February 3, 2023 54 $ 637 $ 1,035 $ 22 $ 10 $ 1,704 Net income — — 98 — — 98 Issuances of stock 1 4 — — — 4 Other comprehensive loss, net of tax — — — ( 6 ) — ( 6 ) Cash dividends of $ 0.37 per share — — ( 20 ) — — ( 20 ) Stock-based compensation — ( 7 ) — — — ( 7 ) Repurchases of stock ( 1 ) ( 71 ) — — — ( 71 ) Deconsolidation of non-controlling interest — — — — ( 10 ) ( 10 ) Balance at May 5, 2023 54 $ 563 $ 1,113 $ 16 $ — $ 1,692 Balance at January 28, 2022 56 $ 838 $ 818 $ ( 37 ) $ 10 $ 1,629 Net income — — 73 — 1 74 Issuances of stock 1 5 — — — 5 Other comprehensive income, net of tax — — — 37 — 37 Cash dividends of $ 0.37 per share — — ( 21 ) — — ( 21 ) Stock-based compensation — ( 4 ) — — — ( 4 ) Repurchases of stock ( 1 ) ( 69 ) — — — ( 69 ) Distributions to non-controlling interest — — — — ( 1 ) ( 1 ) Balance at April 29, 2022 56 $ 770 $ 870 $ — $ 10 $ 1,650 See accompanying notes to condensed and consolidated financial statements. -4- Table of Contents SCIENCE APPLICATIONS INTERNATIONAL CORPORATION CONDENSED AND CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) Three Months Ended May 5, 2023 April 29, 2022 (in millions) Cash flows from operating activities: Net income $ 98 $ 74 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 36 41 Amortization of off-market customer contracts ( 2 ) ( 2 ) Amortization of debt issuance costs 1 2 Deferred income taxes ( 6 ) 2 Stock-based compensation expense 12 11 Gain on divestiture ( 7 ) — Increase (decrease) resulting from changes in operating assets and liabilities, net of the effect of divestitures: Receivables ( 127 ) ( 89 ) Inventory, prepaid expenses and other current assets 4 11 Other assets 4 3 Accounts payable and accrued liabilities 113 39 Accrued payroll and employee benefits ( 43 ) 31 Operating lease assets and liabilities, net ( 3 ) ( 4 ) Other long-term liabilities 2 ( 1 ) Net cash provided by operating activities 82 118 Cash flows from investing activities: Expenditures for property, plant, and equipment ( 6 ) ( 5 ) Purchases of marketable securities ( 3 ) ( 2 ) Sales of marketable securities 1 1 Proceeds from assets held for sale 355 — Cash divested upon deconsolidation of joint venture ( 8 ) — Other ( 3 ) — Net cash provided by (used in) investing activities 336 ( 6 ) Cash flows from financing activities: Dividend payments to stockholders ( 21 ) ( 22 ) Principal payments on borrowings ( 160 ) ( 59 ) Issuances of stock 4 4 Stock repurchased and retired or withheld for taxes on equity awards ( 88 ) ( 84 ) Proceeds from borrowings 160 — Distributions to non-controlling interest — ( 1 ) Net cash used in financing activities ( 105 ) ( 162 ) Net increase (decrease) in cash, cash equivalents and restricted cash 313 ( 50 ) Cash, cash equivalents and restricted cash at beginning of period 118 115 Cash, cash equivalents and restricted cash at end of period $ 431 $ 65 See accompanying notes to condensed and consolidated financial statements. -5- Table of Contents SCIENCE APPLICATIONS INTERNATIONAL CORPORATION NOTES TO CONDENSED AND CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) Note 1— Business Overview and Summary of Significant Accounting Policies: Overview Science Applications International Corporation (collectively, with its consolidated subsidiaries, and herein referred to as "SAIC," the “Company,” "we," "us," or "our") is a leading provider of technical, engineering and enterprise information technology (IT) services primarily to the U.S. government. The Company provides these services for large, complex projects with a targeted emphasis on higher-end, differentiated technology services and solutions that accelerate and transform secure and resilient digital environments through system development, modernization, integration, and sustainment to drive enterprise and mission outcomes. The Company is organized as a matrix comprised of two customer facing operating sectors supported by an enterprise solutions and operations organization. The Company's operating sectors are aggregated into one reportable segment for financial reporting purposes. Each of the Company’s two customer facing operating sectors is focused on providing both (1) growth and technology accelerating solutions and (2) core service offerings to one or more agencies of the U.S. federal government. Growth and technology accelerating solutions include the delivery of secure cloud modernization, outcome based enterprise IT as-a-service, and the integration, production and modernization of defense systems. Core service offerings include systems engineering, the operation and maintenance of existing IT systems and networks, and logistics and supply chain solutions. Principles of Consolidation and Basis of Presentation The accompanying financial information was prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission for interim reporting purposes. References to “financial statements” refer to the condensed and consolidated financial statements of the Company, which include the statements of income and comprehensive income, balance sheets, statements of equity and statements of cash flows. These financial statements were prepared in accordance with U.S. generally accepted accounting principles (GAAP). All intercompany transactions and account balances within the Company have been eliminated. The financial statements are unaudited, but in the opinion of management include all adjustments necessary for a fair presentation thereof. The results reported in these financial statements are not necessarily indicative of results that may be expected for the entire year and should be read in conjunction with the information contained in the Company’s Annual Report on Form 10-K for the year ended February 3, 2023. Use of Estimates The preparation of the financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingencies at the date of the financial statements, as well as the reported amounts of revenues and expenses during the reporting periods. Significant estimates inherent in the preparation of the financial statements may include, but are not limited to estimated profitability of long-term contracts, income taxes, fair value measurements, fair value of goodwill and other intangible assets, pension and defined benefit plan obligations, and contingencies. Estimates have been prepared by management on the basis of the most current and best available information at the time of estimation and actual results could differ from those estimates. Reporting Periods The Company utilizes a 52/53 week fiscal year ending on the Friday closest to January 31, with fiscal quarters typically consisting of 13 weeks. Fiscal 2024 began on February 4, 2023 and ends on February 2, 2024, while fiscal 2023 began on January 29, 2022 and ended on February 3, 2023. Operating Cycle The Company’s operating cycle may be greater than one year and is measured by the average time intervening between the inception and the completion of contracts. -6- Table of Contents SCIENCE APPLICATIONS INTERNATIONAL CORPORATION NOTES TO CONDENSED AND CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) Derivative Instruments Designated as Cash Flow Hedges Derivative instruments are recorded on the condensed and consolidated balance sheets at fair value. Unrealized gains and losses on derivatives designated as cash flow hedges are reported in other comprehensive income (loss) and reclassified to earnings in a manner that matches the timing of the earnings impact of the hedged transactions. The Company’s fixed interest rate swaps are considered over-the-counter derivatives, and fair value is calculated using a standard pricing model for interest rate swaps with contractual terms for maturities, amortization and interest rates. Level 2, or market observable inputs (such as yield and credit curves), are used within the standard pricing models in order to determine fair value. The fair value is an estimate of the amount that the Company would pay or receive as of a measurement date if the agreements were transferred to a third party. See Note 8 for further discussion on the Company’s derivative instruments designated as cash flow hedges. Marketable Securities Investments in marketable securities consist of equity securities, which are recorded at fair value using observable inputs such as quoted prices in active markets (Level 1). As of May 5, 2023 and February 3, 2023, the fair value of the Company's investments totaled $ 29 million and $ 28 million, respectively, and are included in other assets on the condensed and consolidated balance sheets. The Company's investments are primarily held in a custodial account, which includes investments to fund its deferred compensation plan liabilities. Cash, Cash Equivalents and Restricted Cash The following table provides a reconciliation of cash, cash equivalents and restricted cash to amounts reported on the condensed and consolidated balance sheets for the periods presented: May 5, 2023 February 3, 2023 (in millions) Cash and cash equivalents $ 422 $ 109 Restricted cash included in inventory, prepaid expenses and other current assets 5 5 Restricted cash included in other assets 4 4 Cash, cash equivalents and restricted cash $ 431 $ 118 Acquisition and Integration Costs Acquisition-related costs that are not part of the purchase price consideration are generally expensed as incurred, except for certain costs that are deferred in connection with the issuance of debt. These costs typically include transaction-related costs, such as finder’s fees, legal, accounting, and other professional costs. Integration-related costs represent costs directly related to combining the Company and its acquired businesses. Integration-related costs typically include strategic consulting services, facility consolidations, employee-related costs, such as retention and severance, costs to integrate information technology infrastructure, enterprise planning systems, processes, and other non-recurring integration-related costs. Acquisition and integration costs are presented together as acquisition and integration costs on the condensed and consolidated statements of income. -7- Table of Contents SCIENCE APPLICATIONS INTERNATIONAL CORPORATION NOTES TO CONDENSED AND CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) The amounts recognized in acquisition and integration costs on the condensed and consolidated statements of income are as follows: Three Months Ended April 29, 2022 (in millions) Acquisition (1) $ ( 1 ) Integration 10 Total acquisition and integration costs $ 9 (1) Acquisition expenses for the three months ended April 29, 2022 relate to the acquisition of Koverse. Restructuring During the three months ended May 5, 2023, the Company incurred $ 1 million of restructuring costs associated with the optimization and consolidation of certain facilities. These costs are presented within selling, general and administrative expenses on the condensed and consolidated statements of income. Investments in Equity Securities The Company invests in certain companies that advance or develop new technologies applicable to its business. The Company also occasionally forms joint ventures as a part of its investment strategy for the purpose of bidding and executing on specific projects. Each investment is evaluated for consolidation under the variable interest entities (VIEs) model and/or the voting interest model. The results of these investments are not material to the unaudited condensed and consolidated financial statements for the periods presented. The Company applies the equity method of accounting to its unconsolidated investments when it has the ability to exercise significant influence over the entity and recognizes its proportionate share of the entities’ net income or loss within other operating income on the condensed and consolidated statements of income. Equity investments in entities over which the Company does not have the ability to exercise significant influence and whose securities do not have a readily determinable fair value are carried at cost or cost net of other-than-temporary impairments. Accounting Standards Updates In September 2022, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2022-04, Liabilities—Supplier Finance Programs (Subtopic 405-50) , which requires annual and interim disclosures for entities that use supplier finance programs in connection with the purchase of goods and services. The new standard does not affect the recognition, measurement or financial statement presentation of supplier finance program obligations. These amendments are effective for fiscal years beginning after December 15, 2022, except for the requirement to provide rollforward information, which is effective for fiscal years beginning after December 15, 2023. Early adoption is permitted. The Company adopted the requirements of ASU 2022-04 effective the first day of fiscal 2024. The Company maintains a supplier finance program through a financial institution in which participating suppliers, at their sole discretion, may enroll with the financial institution to finance at a discounted price one or more payment obligations of the Company prior to their scheduled due dates. As of May 5, 2023, payment obligations outstanding under the Company’s supplier finance program were not material . Note 2— Earnings Per Share, Share Repurchases and Dividends: Earnings Per Share (EPS) Basic EPS is computed by dividing net income attributable to common stockholders by the basic weighted-average number of shares outstanding. Diluted EPS is computed similarly to basic EPS, except the weighted-average number of shares outstanding is increased to include the dilutive effect of outstanding stock options and other stock-based awards. -8- Table of Contents SCIENCE APPLICATIONS INTERNATIONAL CORPORATION NOTES TO CONDENSED AND CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) The following table provides a reconciliation of the weighted-average number of shares outstanding used to compute basic and diluted EPS for the periods presented: Three Months Ended May 5, 2023 April 29, 2022 (in millions) Basic weighted-average number of shares outstanding 54.3 56.1 Dilutive common share equivalents - stock options and other stock-based awards 0.5 0.5 Diluted weighted-average number of shares outstanding 54.8 56.6 Antidilutive stock awards excluded from the weighted-average number of shares outstanding used to compute diluted EPS for the three months ended May 5, 2023 and April 29, 2022 were immaterial . Share Repurchases The Company may repurchase shares in accordance with established repurchase plans. The Company retires its common stock upon repurchase with the excess over par value allocated to additional paid-in capital. The Company has not made any material purchases of common stock other than in connection with established share repurchase plans. In June 2022, the number of shares of the Company's common stock that may be repurchased under its existing repurchase plan was increased by 8.0 million shares, bringing the total authorized shares to be repurchased under the plan to approximately 24.4 million shares. As of May 5, 2023, the Company has repurchased approximately 17.7 million shares of common stock under the program. Dividends The Company declared and paid a quarterly dividend of $ 0.37 per share of its common stock during the three months ended May 5, 2023. Note 3— Revenues: Changes in Estimates on Contracts Changes in estimates of revenues, cost of revenues or profits related to performance obligations satisfied over time are recognized in operating income in the period in which such changes are made for the inception-to-date effect of the changes. Changes in these estimates can occur routinely over the performance period for a variety of reasons, which include: changes in scope; changes in cost estimates due to unanticipated cost growth or reassessments of risks impacting costs; changes in the estimated transaction price, such as variable amounts for incentive or award fees; and performance being better or worse than previously estimated. A significant portion of the Company's contracts recognize revenue on performance obligations using a cost input measure (cost-to-cost), which requires estimates of total costs at completion. In cases when total expected costs exceed total estimated revenues for a performance obligation, the Company recognizes the total estimated loss in the quarter identified. Total estimated losses are inclusive of any unexercised options that are probable of award, only if they increase the amount of the loss. -9- Table of Contents SCIENCE APPLICATIONS INTERNATIONAL CORPORATION NOTES TO CONDENSED AND CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) Aggregate net changes in estimates on contracts accounted for using the cost-to-cost method of accounting were recognized in operating income as follows: Three Months Ended May 5, 2023 April 29, 2022 (in millions, except per share amounts) Net favorable adjustments $ 5 $ 5 Net favorable adjustments, after tax 4 4 Diluted EPS impact $ 0.07 $ 0.07 Revenues were $ 5 million and $ 4 million higher for the three months ended May 5, 2023 and April 29, 2022, respectively, due to net revenue recognized from performance obligations satisfied in prior periods. Disaggregation of Revenues The Company's revenues are generated primarily from long-term contracts with the U.S. government including subcontracts with other contractors engaged in work for the U.S. government. The Company disaggregates revenues by customer, contract type and prime versus subcontractor to the federal government. Disaggregated revenues by customer were as follows: Three Months Ended May 5, 2023 April 29, 2022 (in millions) Department of Defense $ 1,071 $ 946 Other federal government agencies 920 1,013 Commercial, state and local 37 37 Total $ 2,028 $ 1,996 Disaggregated revenues by contract type were as follows: Three Months Ended May 5, 2023 April 29, 2022 (in millions) Cost reimbursement $ 1,112 $ 1,095 Time and materials (T&M) 367 386 Firm-fixed price (FFP) 549 515 Total $ 2,028 $ 1,996 Disaggregated revenues by prime versus subcontractor were as follows: Three Months Ended May 5, 2023 April 29, 2022 (in millions) Prime contractor to federal government $ 1,855 $ 1,822 Subcontractor to federal government 136 137 Other 37 37 Total $ 2,028 $ 1,996 -10- Table of Contents SCIENCE APPLICATIONS INTERNATIONAL CORPORATION NOTES TO CONDENSED AND CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) Contract Balances Contract balances for the periods presented were as follows: Balance Sheet line item May 5, 2023 February 3, 2023 (in millions) Billed and billable receivables, net (1) Receivables, net $ 588 $ 572 Contract assets - unbillable receivables Receivables, net 407 364 Contract assets - contract retentions Other assets 14 15 Contract liabilities - current Accounts payable and accrued liabilities 47 48 Contract liabilities - non-current Other long-term liabilities $ 3 $ 4 (1) Net of allowance of $ 4 million as of May 5, 2023 and February 3, 2023. During the three months ended May 5, 2023 and April 29, 2022, the Company recognized revenues of $ 21 million and $ 27 million, respectively, relating to amounts that were included in the opening balance of contract liabilities as of February 3, 2023 and January 28, 2022, respectively. Remaining Performance Obligations As of May 5, 2023, the Company had approximately $ 5 billion of remaining performance obligations. Remaining performance obligations exclude any variable consideration that is allocated entirely to unsatisfied performance obligations on the Company's supply chain contracts. The Company expects to recognize revenue on approximately 85 % of the remaining performance obligations over the next 12 months and approximately 95 % over the next 24 months, with the remaining recognized thereafter. Lessor Revenue The Company leases IT equipment and hardware to its customers. All of the Company’s lessor arrangements are operating leases. Operating lease income is recognized on a straight-line basis over the term of the lease and is reported as revenue on the condensed and consolidated statements of income. During the three months ended April 29, 2022, the Company recognized revenue of $ 23 million from the exercise of purchase options under certain lessor arrangements. Operating lease income was immaterial for the three months ended May 5, 2023 and April 29, 2022. Note 4— Divestitures: FSA Amendment On February 4, 2023, the Company sold 0.1 % of its 50.1 % majority ownership interest in Forfeiture Support Associates J.V. (FSA) to its sole joint venture partner for a nominal amount. As a result of the sale and amendment to the joint venture operating agreement of FSA, the Company no longer controls the joint venture and will account for its retained interest as an equity method investment as of the date of the transaction. The Company remeasured its retained investment in FSA to a fair value of $ 14 million which is included within other assets on the condensed and consolidated balance sheets. The remeasurement resulted in a gain of $ 7 million which is included within other operating income on the condensed and consolidated statements of income. The Company estimated the fair value of its retained investment in FSA based on Level 3 inputs of the fair value hierarchy. The Company used the income approach which involves the use of estimates and assumptions, including revenue growth rates, projected operating margins, discount rates and terminal growth rates. -11- Table of Contents SCIENCE APPLICATIONS INTERNATIONAL CORPORATION NOTES TO CONDENSED AND CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) Sale of Logistics and Supply Chain Management Business On March 23, 2023, the Company executed a definitive agreement to sell its logistics and supply chain management business (Supply Chain Business) to ASRC Federal Holding Company, LLC (ASRC Federal), a subsidiary of Arctic Slope Regional Corporation, for $ 350 million of pre-tax cash proceeds, subject to certain adjustments for working capital. The sale enables the Company to focus its resources on long-term strategic growth areas. The Company has presented the associated assets and liabilities of the Supply Chain Business as held for sale. The major classes of assets and liabilities classified as held for sale as of May 5, 2023 were as follows: May 5, 2023 (in millions) Assets held for sale: Receivables, net $ 46 Inventory, prepaid expenses and other current assets 73 Goodwill 60 Operating lease right of use assets 2 Total assets held for sale $ 181 Liabilities held for sale: Accounts payable and accrued liabilities $ 63 Accrued payroll and employee benefits 2 Operating lease liabilities 1 Total liabilities held for sale $ 66 The disposition does not represent a strategic shift in operations that will have a material effect on the Company's operations and financial results, and accordingly has not been presented as discontinued operations. During the first quarter of fiscal 2024, the Company received a refundable cash deposit of $ 355 million which represents the expected proceeds due upon closing of the transaction with ASRC Federal including preliminary adjustments for working capital. The Company recognized the cash as a deposit liability for assets held for sale on the condensed and consolidated balance sheets. Note 5— Goodwill and Intangible Assets: Goodwill Goodwill had a carrying value of $ 2,851 million and $ 2,911 million as of May 5, 2023 and February 3, 2023, respectively. Goodwill decreased $ 60 million compared to February 3, 2023 due to the reclassification of goodwill associated with the Supply Chain Business to assets held for sale (see Note 4). There were no impairments of goodwill during the periods presented. Intangible Assets Intangible assets, all of which were finite-lived, consisted of the following: May 5, 2023 February 3, 2023 Gross carrying value Accumulated amortization Net carrying value Gross carrying value Accumulated amortization Net carrying value (in millions) Customer relationships $ 1,462 $ ( 489 ) $ 973 $ 1,467 $ ( 466 ) $ 1,001 Developed technology 10 ( 3 ) 7 10 ( 2 ) 8 Trade name 1 ( 1 ) — 1 ( 1 ) — Total intangible assets $ 1,473 $ ( 493 ) $ 980 $ 1,478 $ ( 469 ) $ 1,009 -12- Table of Contents SCIENCE APPLICATIONS INTERNATIONAL CORPORATION NOTES TO CONDENSED AND CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) Amortization expense related to intangible assets was $ 29 million and $ 33 million for the three months ended May 5, 2023 and April 29, 2022, respectively. There were no intangible asset impairment losses during the periods presented. As of May 5, 2023, the estimated future annual amortization expense related to intangible assets is as follows: Fiscal Year (in millions) Remainder of 2024 $ 86 2025 115 2026 115 2027 115 2028 98 Thereafter 451 Total $ 980 Actual amortization expense in future periods could differ from these estimates as a result of future acquisitions, divestitures, impairments, and other factors. Note 6— Income Taxes: The Company's effective income tax rate was 20.0 % and 22.0 % for the three months ended May 5, 2023 and April 29, 2022, respectively. The Company’s effective tax rate was lower for the three months ended May 5, 2023 compared to the prior year period, primarily due to an increased deduction for foreign-derived intangible income and higher tax benefits from stock-based compensation. Beginning in fiscal 2023, the Tax Cuts and Jobs Act of 2017 (TCJA) eliminated the option for taxpayers to deduct certain research and development expenditures in the year incurred and instead requires taxpayers to capitalize and amortize such research expenditures over five years. The Company's liabilities for uncertain tax positions were $ 176 million and $ 156 million as of May 5, 2023 and February 3, 2023, respectively. The increase during the three months ended May 5, 2023 is primarily related to research tax credits and capitalized research and development costs pursuant to the TCJA, with a corresponding $ 15 million increase to deferred tax assets. As of May 5, 2023 and February 3, 2023, the net deferred tax asset balance was $ 37 million and $ 14 million, respectively, and is presented in other assets on the condensed and consolidated balance sheets. -13- Table of Contents SCIENCE APPLICATIONS INTERNATIONAL CORPORATION NOTES TO CONDENSED AND CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) Note 7— Debt Obligations: The Company’s long-term debt as of the dates presented was as follows: May 5, 2023 February 3, 2023 Stated interest rate Effective interest rate Principal Unamortized debt issuance costs Net Principal Unamortized debt issuance costs Net (dollars in millions) Term Loan A Facility due June 2027 6.33 % 6.45 % $ 1,230 $ ( 5 ) $ 1,225 $ 1,230 $ ( 5 ) $ 1,225 Term Loan B Facility due October 2025 6.96 % 7.17 % 488 ( 2 ) 486 488 ( 3 ) 485 Term Loan B2 Facility due March 2027 6.96 % 7.41 % 272 ( 4 ) 268 272 ( 4 ) 268 Senior Notes due April 2028 4.88 % 5.11 % 400 ( 4 ) 396 400 ( 4 ) 396 Total long-term debt $ 2,390 $ ( 15 ) $ 2,375 $ 2,390 $ ( 16 ) $ 2,374 Less current portion 46 — 46 31 — 31 Total long-term debt, net of current portion $ 2,344 $ ( 15 ) $ 2,329 $ 2,359 $ ( 16 ) $ 2,343 As of May 5, 2023, the Company has a $ 3.0 billion secured credit facility (the Credit Facility) consisting of a Term Loan A Facility due June 2027, a Term Loan B Facility due October 2025, a Term Loan B2 Facility due March 2027 (together, the Term Loan Facilities), and a $ 1.0 billion Revolving Credit Facility due June 2027 (the Revolving Credit Facility). During the three months ended May 5, 2023, the Company borrowed and repaid $ 160 million under the Revolving Credit Facility. There was no balance outstanding on the Revolving Credit Facility as of May 5, 2023. As of May 5, 2023, the Company was in compliance with the covenants under its Credit Facility. As of May 5, 2023 and February 3, 2023, the carrying value of the Company’s outstanding debt obligations approximated its fair value. The fair value of long-term debt is calculated using Level 2 inputs, based on interest rates available for debt with terms and maturities similar to the Company’s Term Loan Facilities and Senior Notes. Note 8— Derivative Instruments Designated as Cash Flow Hedges: The Company’s derivative instruments designated as cash flow hedges consist of: Fair Value of Asset (1) at Notional Amount at May 5, 2023 Pay Fixed Rate Receive Variable Rate Settlement and Termination May 5, 2023 February 3, 2023 (in millions) (in millions) Interest rate swaps #1 $ 685 2.96 % Term SOFR Monthly through October 31, 2025 $ 11 $ 16 Interest rate swaps #2 463 2.36 % Term SOFR Monthly through October 31, 2023 6 9 Total $ 1,148 $ 17 $ 25 (1) The fair value of the fixed interest rate swap asset is included in other assets on the condensed and consolidated balance sheets. The Company is party to fixed interest rate swap instruments that are designated and accounted for as cash flow hedges to manage risks associated with interest rate fluctuations on a portion of the Company’s floating rate debt. The counterparties to all swap agreements are financial institutions. -14- Table of Contents SCIENCE APPLICATIONS INTERNATIONAL CORPORATION NOTES TO CONDENSED AND CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) See Note 9 for the unrealized change in fair values on cash flow hedges recognized in other comprehensive income (loss) and the amounts reclassified from accumulated other comprehensive income (loss) into earnings for the current and comparative periods presented. The Company estimates that it will reclassify $ 18 million of unrealized gains from accumulated other comprehensive income into earnings in the twelve months following May 5, 2023. Note 9— Changes in Accumulated Other Comprehensive Income (Loss) by Component: The following table presents the changes in accumulated other comprehensive income (loss) attributable to the Company’s fixed interest rate swap cash flow hedges that are discussed in Note 8 and the Company's defined benefit plans. Unrealized Gains (Losses) on Fixed Interest Rate Swap Cash Flow Hedges (1) Defined Benefit Obligation Adjustment Total (in millions) Three months ended May 5, 2023 Balance at February 3, 2023 $ 18 $ 4 $ 22 Other comprehensive loss before reclassifications ( 2 ) — ( 2 ) Amounts reclassified from accumulated other comprehensive income ( 6 ) — ( 6 ) Income tax impact 2 — 2 Net other comprehensive loss ( 6 ) — ( 6 ) Balance at May 5, 2023 $ 12 $ 4 $ 16 Three months ended April 29, 2022 Balance at January 28, 2022 $ ( 38 ) $ 1 $ ( 37 ) Other comprehensive income before reclassifications 42 — 42 Amounts reclassified from accumulated other comprehensive loss 8 — 8 Income tax impact ( 13 ) — ( 13 ) Net other comprehensive income 37 — 37 Balance at April 29, 2022 $ ( 1 ) $ 1 $ — (1) The amount reclassified from accumulated other comprehensive income (loss) is included in interest expense. -15- Table of Contents SCIENCE APPLICATIONS INTERNATIONAL CORPORATION NOTES TO CONDENSED AND CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) Note 10— Sales of Receivables: The Company has a Master Accounts Receivable Purchase Agreement (MARPA Facility) with MUFG Bank, Ltd. (the Purchaser) for the sale of up to a maximum amount of $ 300 million of certain designated eligible receivables with the U.S. government. During the three months ended May 5, 2023 and April 29, 2022, the Company incurred purchase discount fees of $ 3 million and $ 1 million, respectively, which are presented in other (income) expense, net on the condensed and consolidated statements of income and are reflected as cash flows from operating activities on the condensed and consolidated statements of cash flows. MARPA Facility activity consisted of the following: Three Months Ended May 5, 2023 April 29, 2022 (in millions) Beginning balance $ 250 $ 200 Sale of receivables 866 934 Cash collections ( 866 ) ( 934 ) Outstanding balance sold to Purchaser (1) 250 200 Cash collected, not remitted to Purchaser (2) ( 40 ) ( 22 ) Remaining sold receivables $ 210 $ 178 (1) There was no net impact to cash flows from operating activities from sold receivables for the three months ended May 5, 2023 and April 29, 2022. (2) Primarily represents the cash collected on behalf of but not yet remitted to the Purchaser as of May 5, 2023 and April 29, 2022. This balance is included in accounts payable and accrued liabilities on the condensed and consolidated balance sheets. Note 11— Legal Proceedings and Other Commitments and Contingencies: Legal Proceedings The Company is involved in various claims and lawsuits arising in the normal conduct of its business, none of which the Company’s management believes, based on current information, is expected to have a material adverse effect on the Company’s financial position, results of operations or cash flows. In April 2022, the Company received a Federal Grand Jury Subpoena in connection with a criminal investigation being conducted by the U.S. Department of Justice, Antitrust Division (DOJ). As required by the subpoena, the Company has provided the DOJ with a broad range of documents related to the investigation, and the Company’s collection and production process remains ongoing. The Company is fully cooperating with the investigation. At this time, it is not possible to determine whether the Company will incur, or to reasonably estimate the amount of, any fines, penalties or further liabilities in connection with the investigation pursuant to which the subpoena was issued. AAV Termination for Convenience On August 27, 2018, the Company received a stop-work order from the United States Marine Corps on the Assault Amphibious Vehicle (AAV) contract and on October 3, 2018 the program was terminated for convenience by the customer. The Company is continuing to negotiate with the Marine Corps to recover costs associated with the termination. -16- Table of Contents SCIENCE APPLICATIONS INTERNATIONAL CORPORATION NOTES TO CONDENSED AND CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) Government Investigations, Audits and Reviews The Company is routinely subject to investigations and reviews relating to compliance with various laws and regulations with respect, in particular, to its role as a contractor to federal, state and local government customers and in connection with performing services in countries outside of the United States. U.S. government agencies, including the Defense Contract Audit Agency (DCAA), the Defense Contract Management Agency and others, routinely audit and review a contractor’s performance on government contracts, indirect rates and pricing practices, and compliance with applicable contracting and procurement laws, regulations and standards. They also review the adequacy of the contractor’s compliance with government standards for its business systems. Adverse findings in these investigations, audits, or reviews can lead to criminal, civil or administrative proceedings, and the Company could face disallowance of previously billed costs, penalties, fines, compensatory damages and suspension or debarment from doing business with governmental agencies. Due to the Company’s reliance on government contracts, adverse findings could also have a material impact on the Company’s business, including its financial position, results of operations and cash flows. The indirect cost audits by the DCAA of the Company’s business remain open for certain prior years and the current year. Although the Company has recorded contract revenues based on an estimate of costs that the Company believes will be approved on final audit, the Company does not know the outcome of any ongoing or future audits. If future completed audit adjustments exceed the Company’s reserves for potential adjustments, the Company’s profitability could be materially adversely affected. As of May 5, 2023, the Company believes it has adequately reserved for estimated net amounts to be refunded to customers for potential adjustments for indirect cost audits and compliance with U.S. government Cost Accounting Standards. Letters of Credit and Surety Bonds The Company has outstanding obligations relating to letters of credit of $ 9 million as of May 5, 2023, principally related to guarantees on insurance policies. The Company also has outstanding obligations relating to surety bonds of $ 19 million, principally related to performance and payment bonds on the Company’s contracts. Note 12— Subsequent Events: Sale of Logistics and Supply Chain Management Business On May 6, 2023, the Company closed the sale of its Supply Chain Business to ASRC Federal for $ 355 million in cash, subject to certain post-closing adjustments for working capital. The Company expects to record a gain during the second quarter of fiscal 2024 upon the completion of the divestiture. Quarterly Dividend Declared On June 1, 2023, the Company's Board of Directors declared a quarterly dividend of $ 0.37 per share of the Company's common stock payable on July 28, 2023 to stockholders of record on July 14, 2023. -17- Table of Contents SCIENCE APPLICATIONS INTERNATIONAL CORPORATION